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Performance ahead of expectations

Maintaining its RoE improvement journey (15.6% v/s 15% in Q1 FY24), Home First delivered a 4% beat on our NII/PPOP expectations (ex. of DA income) and 5% beat on PAT. The stronger performance was characterized by sustained robust disbursement/AUM growth momentum (up 37%/33% yoy) and stable asset quality performance (steady 30+ dpd). Spreads expectedly came-off by 20 bps on increase in CoF and marginal dip in portfolio yield (competitive rates on fresh loans).

BT Out increased sequentially from 6.5% to 8.6% due to increased competitive intensity in larger markets and transmission of 125 bps rate hikes to customers over the past 12 months. Bounce Rates moved down during Q2 FY24 (14.2% v/s 15% in Q1 FY24), but it has seasonally spiked to 15.7% in October due to festivities (similar spike was seen in Sept-Oct 2022). Though Stage-2 bucket was stable, there was a slight decline in ECL coverage. Write-offs were around Rs50mn and credit cost for the quarter was 40 bps.

Management remains upbeat on growth and RoE

Home First is confident of 30%+ AUM growth in FY24 and about surpassing Rs100bn AUM mark in next 12 months. It is targeting 30% pa growth even in FY25 and FY26 with drivers being branch addition (20-30 pa) and augmentation of relationship officers and connectors. Distribution strategy includes deepening presence in existing states and expansion in newer states like UP, RJ and MP (mainly northern and central markets). Co-lending disbursements were Rs500mn in Q2 FY24, and its share is expected to increase to 10% in the future. Co. has taken initiatives to control BT Out which include sensitizing/coaching branch teams and monitoring and engaging with likely BT customers.

CoF is expected to further increase by 20 bps in H2 FY4, with the rise mitigated by likely availment on Rs4.5bn of NHB sanction. However, portfolio spread cam move marginally lower in the near term due to pressure on portfolio yield. Opex/Assets is guided between 3-3.2% for coming quarters due to distribution expansion. Besides sustenance of strong growth, increasing share of co-lending would lift RoE in the medium term.

Another quarter of earnings upgrade; maintain BUY

We raise FY24/25 earnings estimates by 1-3%. Home First has demonstrated consistent strong execution on growth, asset quality and RoE improvement which has supported its valuation re-rating (currently at 3.5x/22x PABV/PE on FY25 estimates). With valuation approaching near fair levels, one needs to closely monitor future RoE drivers viz. disbursement growth momentum, trends in BT Out, movement in loan spread and ECL coverage levels. We retain BUY rating on the stock with an increased 12m PT of Rs1,100. However, our order of preference among affordable HFCs is Aptus, Home First and Aavas.

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